Many successful TOP101 companies use M&A as part of their growth strategy

Tiina Sõber

Prudentia Tallinn, Project Manager

While in terms of mergers and acquisitions (M&A), 2021 was globally a record year, the year 2022 turned out to be much more modest. Russia's invasion of Ukraine, rising interest rates, high inflation, and the growing gap between price expectations and real value have created a situation where this year’s volume of transactions could be lower than in the year of the pandemic, ie 2020. 

According to Mergermarket data, in the first nine months of 2022, global M&A transactions totaled $2.97 trillion, but the third quarter amounted to only $722 billion. The third-quarter result is 38% lower than the second quarter, and 54% lower than a year earlier. By sectors, the tech sector remains the largest in terms of the amount of transactions (20%), followed by utilities and energy (11%) as well as healthcare (9%). 

As usual, global trends arrive in Estonia with a slight delay. The number of M&A transactions in Estonia did not decrease in 2022 compared to 2021. In the first month of 2022, the Estonian Competition Authority received 50 merger notifications, or 5 more than a year earlier. At the same time, there have been no major transactions worth more than €1 billion. The most active sectors in Estonia both in terms of M&A and in the TOP101 ranking of Estonia’s most valuable enterprises are the tech sector as well as utilities and energy. The only healthcare sector representative in the TOP101 most valuable companies is Synlab, the largest medical laboratory in Estonia. However, in terms of M&A, the healthcare sector is very active. Because of market fragmentation, transactions are not large, but the market is being consolidated. One very acquisitive company in the healthcare sector is Confido Healthcare Group which has in recent years acquired a number of different clinics that has allowed it to employ more healthcare specialists and expand its range of services.

According to the Founders' Society, Estonian tech companies have raised a record 1.3 billion euros in the first 10 months of 2022. Nearly half of this amount, more precisely 628 million euros, was raised by Bolt that according to TOP Tech ranking was Estonia's most valuable technology company already at the start of 2022. Bolt itself is not included in the TOP101 ranking since according to the methodology, the company value is calculated on the basis of EBITDA (profit before interest, taxes and depreciation) multiple and Bolt has until now not made a profit. Among investors in the technology sector in 2022 are, among others, Luminor and LHV, two banks ranked in the TOP101. In March, Luminor acquired Maksekeskus. In turn, in March LHV acquired EveryPay and in April announced an investment of €1 million in the Estonian financial tech company Tuum.

There are already several utilities and energy sector companies in the TOP101 ranking and because of the deepening energy crisis, investments in the energy sector remain high. For example, Gren Tartu, which is included in the TOP101 ranking, in October announced the acquisition of Kirde Soojus. Kirde Soojus is the parent company of VKG Soojus which was formerly owned by Viru Keemia Group, and specialises in the transmission and sale of thermal energy through a district heating network in Kohtla-Järvi and Jõhvi. Speaking of companies investing in renewable energy, one must mention Sunly, the developer of solar and wind parks, which in October raised €200 million. Sunly did not make it to the TOP101 this year as its EBITDA for 2021 was negative, but it has every potential to make the list in the coming years. Another active investors in this sector is Enefit Green that was ranked 7th overall in this year's TOP101.

It is nice to see that Estonian companies are no longer only the ones being acquired, but that M&A is used as one of the strategies for expanding existing business and for entering new markets. IT development companies Nortal and Helmes, both of which are included in the TOP101, are setting an example having made a number of transactions in recent years and have thus expanded their business internationally. Another good example is LHV, whose subsidiary in October acquired the SME lending business of Bank North that operates in the UK and at the end of September started the liquidation process. The transaction will enable LHV to enter the UK lending market. LHV previously held a 9.3% stake in Bank North as an investment.

When making predictions about the next year's M&A market, the keyword is caution. The cost of money in the market is increasing and, as a result, investors are clearly more selective than before. With regard to the technology sector in particular, investors no longer focus solely on rapid growth, but rather look at the combination of growth and profitability. At the same time, certain sectors remain very active. This is most evident in the sectors of medicine and energy, which may indicate that we will see more companies from these sectors in the coming TOP101 rankings.